wednesday, july 29, 2020

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a smaRt Read foR smaRt ReadeRs

coVID-19crisisPromptsRefresheron

Ga.InsolvencyLaw

RobeRt MeRceR

potential lawyer liability and loss of

privilege resulting from such advice.

Given the COviD-19 pandemic’s note: the names of the individuals

effect on the economy, it is a good

and businesses and the events set

time for lawyers to brush up on Geor- forth below are fictional.

gia insolvency law. insolvency law

can be challenging because it is often Plummeting Revenues

counterintuitive to lawyers whose

One morning, Anne, a leading

practice does not focus on insolvency.

Atlanta corporate finance lawyer,

As a result, lawyers may unknowing- gets a call from one of her longtime

ly advise clients to take actions that

clients, Bob. Anne has represented

violate insolvency law, potentially

Bob, a well-known Atlanta entrepre-

RobeRt MeRceRis the founder of

mercer Law, a boutique law firm in atlanta

that focuses on high-stakes bankruptcy

and insolvency engagements.

exposing their clients and themselves neur, and his entities for more than

to liability.

30 years.

in the hypothetical below, a law-

yer advises a director and officer, or

Bob is calling about Close-Contact

events inc., a corporation organized

D&O, of an insolvent Georgia cor- under Georgia law. Bob is the presi-

Bob further tells Anne that the

poration to use such corporation’s dent and sole member of the board of chief financial officer of Drinks and

remaining cash to pay a debt owed to directors of Close-Contact.

the D&O as well as the D&O’s guar-

Given the length of the relation-

Snacks inc. Drinks, a concessions

company, told Bob it plans to sue

anteed debt. the lawyer advises the ship, Anne takes a relaxed approach him on his personal guaranty unless

client thereafter to make a 14-cent to sending engagement letters. As

he brings Drinks current on $3.5 mil-

lion of outstanding invoices.

pro rata distribution to the corpora-

a result, Anne does not send any

tion’s remaining creditors.

engagement letter in connection with

Bob informs Anne that Close-

Contact is insolvent and not going to

survive unless he invests substantially

While such advice may seem innoc- advising Bob on the call or the related

uous to many lawyers, it will most

work she does because of it.

likely expose the client to liability

Bob tells Anne that, because of the more of his personal funds, which he

under Georgia’s trust fund doctrine pandemic, the revenues of Close-

and fraudulent concealment liability.

Contact have plummeted, causing

this article is the first in a two-part it to fall behind in its payments to

is unwilling to do. Close-Contact has

$11.5 million of cash along with vari-

ous personal property of de minimis

value and $54.5 million of unsecured

series. the next article will discuss creditors.

daily RepoRt wednesday, july 29, 2020

debt. Bob complains that, on top of Georgia’s trust fund

his guaranty liability, Close-Contact doctrine: the fiduciary

owes him $1 million on account of an duty of d&os to Creditors

Bob’s letter to creditors neither

mentions his $1 million payment to

himself nor his $3.5 million payment

officer loan.

Under Georgia’s trust fund doc- to Drinks because of his personal

Anne advises Bob to use the trine, Bob may have liability to Liti-

remaining cash to cause Close-Con- gious Creditor.

guaranty. Such omissions may consti-

tute fraudulent concealment. See also

Forsman, 803 S.e.2d at n.7 (implying

that a managing member might have

fraudulent concealment liability

because his letter to a creditor fails to

disclose a payment to a member).

tact to pay $3.5 million to Drinks and

$1 million to himself. Bob follows

Anne’s advice and makes such wire

As background, under such doc-

trine, “when a corporation becomes

insolvent,” its directors and officers

transfers, leaving Close-Contact with are “bound to manage the remain-

$7 million in cash.

ing assets for the benefit of its credi-

tors.” Hickman v. Hyzer, 401 S.e.2d

Purported Pro Rata distribu-

tion to Remaining Creditors

Anne prepared a letter, which Bob App. 1958) (trust fund doctrine also believe that there was nothing wrong

738, 749 (Ga. 1991); see also Ware v. Key takeaway

Rankin, 104 S.e.2d 555, 558 (Ga. Ct.

it is easy to see how Anne could

signed and sent, to the remaining

creditors of Close-Contact. the letter

informs the creditors that Close-Con-

tact is going out of business but will

be paying each of them 14 cents on

applies to officers).

with Bob paying himself and his guar-

in the context of an insolvent cor- anteed debt ahead of other creditors.

poration, the trust fund doctrine pro- After all, both are bona fide debts,

hibits, among other things, not only

and Georgia law is very clear that a

the payment of the debt of a D&O “debtor may prefer one creditor over

the dollar. Such creditors collectively but also D&O guaranteed debt. another.” O.C.G.A. § 18-2-40. But

hold $50 million in unsecured claims.

Ware, 104 S.e.2d at 559.

Georgia law is equally clear that the

the letter states that Close-Contact

Under these circumstances, there

foregoing statement does not neces-

only has $7 million of remaining cash is a strong argument that both Bob’s sarily apply when D&Os are involved.

and that it will pay each of them their payment on his guaranteed debt and Hodge v. Howes, 578 S.e.2d 904, 907

pro rata share.

his payment to himself violate Geor- (Ga. Ct. App. 2003).

the letter does not mention, how-

ever, the $1 million payment to Bob

or the $3.5 million payment to Drinks,

which eliminated Bob’s guaranty

liability.

gia’s trust fund doctrine. As a result,

As a result of Anne not knowing

Litigious Creditor may be able to “set about Georgia’s trust fund doctrine,

aside” both the $3.5 million payment she gives Bob advice exposing him to

to Drinks and the $1 million payment liability. in the second article, we will

to Bob and seek a judgment from

see that Anne’s advice will not only

each creditor accepts the 14 cents Bob for both amounts. Georgia Com- put the attorney-client privilege at

on the dollar distribution.

mercial Stores, Inc. v. Forsman, 803

risk but will also expose her to signifi-

S.e.2d 805, 810 (Ga. Ct. App. 2017).

cant liability.

Litigious Creditor

threatens to sue

A credit manager for one of the

fraudulent Concealment

Because of Georgia’s trust fund

doctrine and the insolvency of Close-

creditors, Litigious Creditor inc.,

subsequently becomes incensed Contact, Bob probably has a fidu-

when one of his friends who works ciary duty to creditors. As a result of

for Drinks tells him that they got paid such duty, Bob probably has a duty

in full by Close-Contact because Bob to make a complete—rather than a

had guaranteed such debt.

selective and self-serving—disclo-

Litigious Creditor threatens to sue

sure to creditors. Wright v. Apartment

This article appeared as Sponsored Content. Reprinted and slightly modiﬁed with

prohibited, contact 877-257-3382 or reprints@alm.com. DR-08072020-457070

not only Close-Contact but also Bob Invest. & Mgmt. Co., 726 S.e.2d 779,

personally. 787 (Ga. Ct. App. 2012).